Cosmetic Warriors Ltd & Anor v Gerrie

Share pre-emption provisions in articles of association are construed objectively, using ordinary principles of contractual interpretation. No presumption favours either a real-world block valuation or a pro rata valuation. The language, structure and commercial consequences of the particular articles control.

A requirement to determine a fair price per share while valuing the company as a going concern may require a pro rata division of the company's total equity value. This avoids an artificial discount or premium based on a block whose eventual purchasers and division are unknown.

The expression “any person” ordinarily includes a corporation. Clear language is required to confine it to natural persons, particularly because shares are prima facie freely transferable.

The appellants were two companies whose materially identical articles gave existing members rights of pre-emption when shares were transferred. The respondent minority shareholders served notices seeking to sell their entire holdings. The parties disputed how independent accountants should determine the prescribed price and who could acquire shares left unsold after the pre-emption process.

A deputy High Court judge decided the relevant issues substantially in favour of the respondents in [2015] EWHC 3718 (Ch). The companies appealed on whether the shares should be valued pro rata by reference to the whole equity or as a minority block, and whether “any person” in Article 5L meant only a natural person. A further question about valuing the respondents' separate and joint holdings arose only if the block-valuation argument succeeded.

1. Appeal dismissed. The accountants had to determine the prescribed price on the basis of a pro rata proportion of the value of the whole equity of each company. The expression “any person” in Article 5L included a corporate transferee. Henderson LJ gave the judgment, with which Lindblom and Beatson LJJ agreed.

2. Articles of association are a statutory contract and are interpreted according to ordinary principles of contractual construction. The court identifies the objective meaning of the chosen language by considering its natural meaning, the document as a whole, its purpose, admissible background and commercial consequences. Text and context form one unitary and iterative exercise. There was no initial presumption favouring either block or pro rata valuation.

3. Article 5C unambiguously required a prescribed price “per share” and directed the accountants to value the company on a going-concern basis. A valuation of the company on that basis was a valuation of the whole company. The price per share therefore followed by dividing the whole equity value pro rata. The grammar of “the fair value thereof” reinforced that conclusion.

4. A block valuation would also be illogical in the scheme of Article 5. When valuing the shares, the accountants could not know how the block would ultimately be divided, who would acquire it, or whether particular shares would confer control or have special value to a purchaser. The parties were unlikely to have intended a potentially substantial minority discount or control premium based only on the initial block. Earlier decisions on differently worded provisions could offer limited guidance because the result depended on the particular articles.

5. The contingent question concerning separate or combined valuation of the respondents' holdings did not arise and was left open.

6. “Any person” retained its normal legal meaning, which includes a corporation. The distinction between “person” and “company” elsewhere in Article 5 did not provide sufficiently clear language to restrict Article 5L to natural persons. Such a restriction also lacked compelling commercial justification. Existing members and the company could prevent the residual transfer power arising by acquiring the shares during the preceding stages.

1. Court of Appeal (Civil Division): In [2017] EWCA Civ 324, unanimously dismissed the companies' appeal and affirmed the relevant conclusions below.
2. High Court, Chancery Division: In [2015] EWHC 3718 (Ch), Mr Richard Spearman QC, sitting as a deputy High Court judge, decided the valuation and corporate-transferee issues in favour of the respondent shareholders.